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What is economics?
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Economics is the study of how scarce resources are used to satisfy unlimited human wants.
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Factors of prouction
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Resources used to produce goods and services
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Goods
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Tangible items
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Services
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Non-tangible items
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Prouction
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The transformation of factors of production into goods and services.
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Why is scarcity not just a problem for poor countries?
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All countries have scarcities because resources are never unlimited, and wants always are.
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What is opportunity cost?
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The benefit given up by not using one's resources in the best alternative way.
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what are the three concepts illustrated by a production possibilitities frontier and why?
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Choice is indicated by being able to choose different points on the curve. Scarcity is shown by the presence of unattainable combinations 'beyond' the frontier. Opportunity cost is shown by the negative slope; a certain quantity of good one must be given up to obtain a certain quanitty o good two, so the number of each good attainable are inversely proportional.
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Why is the production possibilities frontier concave towards the origin?
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Each factor is not equally useful in producing all goods, but you will use the most suited factors first. However, as you produce more and more the op cost increases.
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Why is a market economy 'self-organizing' ?
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When everyone pursues their own interests, a spontaneous 'order' forms.
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What are the three characteristics of a market economy?
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Efficient, self-organizing, based on incentives and self-interest
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Efficiency
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Refers to how well the economy responds to the desires of the people in it
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What are the two characteristics that define the decisions made by decision-makers?
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Maximizing Decisions, Marginal Decisions
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What are maximizing decisions?
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Mazimizing decisions are decisions that are made to maximize someone's utility (happy)
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What are marginal decisions?
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Marginal decisions refers to decisions that weigh the benefits and costs of acting 'at the margin'. In other words, deciding at the margin means weighing costs and benefits of a single, discrete action. For example, the decision to buy three socks is actually three consecutive marginal decisions to buy a pair of socks.
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Specialization
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The specialization of individual workers in the production of particular goods and services
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Division of Labour
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The breaking up of a production process into a series of specialized tasks, each of which are done by a different worker
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Why do centrally-planned economies often fail?
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Failure of coordination, failure of quality control, misplaced incentives, environmental degradation
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